Wednesday, April 15, 2015

At rm0.58 it is trading at 18 times FY2014 net profit of rm2.56 million.

It had taken steps to grow the group by diversifying into cosmetic & skin care business in 2010, and into manufacturing of fiber products since 2012 had since incur losses. Geshen has disposed these 2 loss-making subsidiaries.

There is a one-off pre-tax gain from disposal of subsidiaries amounting to RM1.194mil in Q4. After deducting this special gain, its plastic segment PBT should be RM7.539mil, and PAT should be RM5.9mil base on similar 21.8% tax rate.

If its plastic business can maintain its performance and reports similar RM5.9mil net profit in FY15, then its EPS will be 7.38sen. The projected PE ratio for FY15 will be 7.8 times.

But there is a big drop in revenue of FY14Q4 due to reduced order.

It had proposed to acquire its peer Polyplas.

Geshen will acquire 75% of Polyplas for RM33.8mil which will be paid by internal fund and issuance of 30 million RCPS at rm0.60 each which are convertible into ordinary shares within 5 years.

The RCPS will raise RM18mil and its holders are entitled to 5.5% dividend per annum.

Geshen has the option to acquire the remaining 25% of Polyplas in the future.

Compared to Geshen's stagnant revenue, Polyplas's revenue improved significantly by 39% year on year in its FY14 (ended Oct14).

Despite lower revenue by half in FY14, Polyplas manage to produce better net profit than Geshen due to its extreme high net profit margin of 18% in FY14 despite an effective tax rate of 22.6%.

Polyplas derives 55% of its revenue from export sales to Asia, Europe and US, while 85% of its raw materials/components are sourced locally in FY14.

Geshen's has largely Japanese customers but Polyplas has wider geographical presence.

Polyplas's main export country in FY14 is US, which makes up about 37% of its export followed by Europe (32%) and Asia (31%). By acquiring Polyplas will give Geshen a good global exposure straight away.

A recovering in US economy will boost Geshen revenue.

Geshen will acquire a 75% stake in Polyplas.

Post corporate exercise, Geshen's outstanding shares will remain at 80 million as long as no RCPS are converted into ordinary shares. Estimate that FY15 EPS for Geshen will be rm0.148. After all the RCPS are converted, Geshen's shares base will increase to 110 million. So diluted estimate EPS will be 10.7sen.

If Polyplas can achieve similar net profit of RM7.9mil in FY15 and Geshen’s 75% stake in Polyplas Gehsen will receive RM5.9mil. By adding a projecting a net profit of Geshen (RM5.9mil) and 75% profit of Polyplas (RM5.9mil), it will be RM11.8mil.

By imputing a conservative 8 times PER diluted EPS of rm0.107, Geshen could be worth rm0.86.

Going forward, it is a matter of time for Geshen to acquire the remaining 25% stakes in Polyplas if the latter remains profitable which in turn will boost Geshen’s profit to Geshen in the future.

Gehsen currently (April 2015) has net cash of RM10.8mil of which RM15.8mil cash is needed to acquire 75% of Polyplas.

Its shares liquidity is very low, merely 80 million paid-up shares in which only 25.96% are in public's hands and the top 30 shareholders have already taken up 91.6% of the company.

Earlier 2015 its public shareholding spread of 22.83% was not compliant with listing rule so its major shareholders have to dispose 2.5mil shares in Feb15 to lift the figure to 25.96%.

Plastic injection molding is a highly competitive industry with over 1,500 manufacturers in the country.